What is money laundering?
Defined in non-technical terms, money laundering is the conversion of 'dirty' money into - seemingly - 'clean' money. Dirty money is money that meets the following conditions: (1) it has been derived by illegal means and (2) for an outside observer it is possible to identify that condition (1) applies.
To give an example: If someone robbed a bank, the cash at his disposal would certainly qualify as dirty money. The same would not necessarily be true in a case of insider trading. Though condition (1) is met, condition (2) applies only weakly, if at all. Money therefore is dirty to differing degrees. And as a rule of thumb - the more dirty money is, the more difficult it is to launder it - other conditions being equal.
How do you do it?
That depends on a range of factors: the amount of money, how 'dirty' it is, if it is a recurring stream of dirty money that needs to be laundered or just a one-off transaction. It depends on the efforts of law-enforcement and on the laundering-infrastructure at your disposal. It also depends on what you want to do with the money afterwards. To make it short: The available methods range from very simple to very confusing, complicated and elaborate.
Fortunately one can abstract from all these tedious complications of reality and then arrives at a fairly simple model that captures the essence of the process. Ideally money laundering consists of three phases:
placement,
layering and
integration.
During the
placement phase the money enters the financial system. Dirty money often begins its existence in the form of cash and cash raises suspicions. Thus, the first task is to convert the cash into book money. Once the money has entered the financial system the
layering starts. You now have to cover the tracks - to delete the past, the illegitimate origins. To do this you commingle the dirty money with legitimate funds, send it on a journey across the world - by way of wire transfer. After you accomplished this task it's time for the
integration. It is good to know that you have a lot of money on a bank account in, say, Nauru, but it is even better if you can spend it. For this you need a plausible explanation as to why you own these funds. Otherwise you will raise suspicions and to avoid that you started the whole laundering process in the beginning.
As stated earlier - this is a stylized model. In reality you will find - maybe more often than not - examples of money laundering that work quite differently. But then again, the launderer is not interested in meeting the requirements of a law-enforcement model.
Why launder dirty money at all?
Basically there are two motives for laundering money: avoiding suspicion and avoiding detection. Avoiding suspicion refers to the need to remove all traces that may indicate a crime has been committed - such as dirty money. Avoiding detection refers to the need to shield the money from attempts to confiscate it. If you are not entitled to own or dispose of money or assets someone may take it away!
Why fight money laundering?
Let's leave the malefactor's perspective and switch to the point of view of the good guys. At first glance the question as to why we should fight money laundering seems strange, for the answer appears to be obvious: because no one should be able to enjoy the fruits of crime. That in fact is a perfectly sensible answer, were it not for the additional difficulty that this fight incurs costs - monetary and otherwise. Costs and benefits should balance and if it turned out that the costs of fighting money laundering exceeded the benefits, well, then maybe we should leave it be. Unfortunately costs and benefits are difficult to calculate and there does not seem to be an easy solution to the problem. The question whether and how we should fight money laundering therefore is controversial - or political, if you want to put it that way.
Now let's hear some the arguments in support of anti-money laundering activities. First of all: a world without money laundering would be a world with significantly less crime. There are mainly two reasons for this conclusion. Firstly, most crime is committed to obtain an (illegal) profit. Since it would be much more difficult to enjoy these profits without money laundering, the incentive for committing crimes of that sort should be significantly reduced. Secondly, money laundering allows for more sophisticated investment of criminally obtained money, thus boosting the financial resources of criminal groups.
A related argument states that by
investigating money laundering we are able to systematically unravel the networks and/or hierarchies of organized crime groups. The "money-trail" leads us to the bosses in the background who do not get involved with the criminal activities that generate the profits.
But maybe "fighting crime" amounts to more than just fighting crime. There are two strands of arguments that try to show that the consequences of money-laundering go further: If left unchecked criminal money will slowly infiltrate the 'legal' economy and in the end will threaten the integrity of the whole society. Whereas a more narrowly economic argument warns that the enormous amounts of dirty money injected into the international financial markets may destabilize the financial system or even be employed to exert pressure on national governments by threatening to speculate against the national currency. But what do we actually know about the amount of dirty money?
How much money is being laundered?
Honestly: no one knows. Yes, there are figures being put forward but one should seriously question their reliability. Oddly enough, people in favour of stricter anti-money laundering laws tend to cite higher figures than people who oppose them…
What do to against money laundering?
Usually one distinguishes between
preventive and
repressive measures which are complementary rather than mutually exclusive.
Preventive measures aim at denying criminals the access to the financial system and tend to rely heavily on cooperation of the private sector. The international standard model envisages that financial institutions identify their customers and keep records maintain internal compliance programmes and actively cooperate with the designated authorities by reporting suspicions of money laundering. The idea of course is that vital information is thereby transmitted from the private sector players that are being 'misused' for money-laundering purposes to the law enforcement agencies.
Repressive measures on the other hand are instituted to facilitate prosecution or to have more effective sanctions at hand. Thus, among the repressive measures we find attempts to facilitate international legal cooperation and asset forfeiture or money laundering provisions in the penal code.
